NIAS Area Studies
PAKISTAN READER
Photo : Reuters/Tyrone Siu
In Focus
By Juan Mary Joseph
China's real estate crisis: The looming fall of China’s Evergrande
China’s real estate giant is at risk of fallout, with larger threats of spill over into other markets and countries On 21 September, China’s, Evergrande Group Chairman Hui Ka Yuan’s efforts to lift market confidence in his debt-ridden real estate company showed no signs of respite with persistent fears of collapse.
China’s Lehman moment?
The Evergrande Group, formerly known as the Evergrande Real Estate Group Limited was founded by businessman Hui Ka Yan as Hengda Group in 1996 in the port city of Guangzhou. With more than 1,300 projects in over 280 cities, spanning over the insurance, football teams, mineral water and food production sectors across China, it was once recognized as the top-selling property developers in the country.
However, Evergrande is currently neck deep in a total debt of over $305 billion, which incidentally is close to 2% of China’s total GDP. The fallout of the real estate giant to the world's most indebted real estate developer could as a result generate large ripples across the world economy.
At the center of the company’s current crisis stands the Chinese government’s clampdown on big real-estate developers last year when it introduced a cap on the amount of debt that such firms could owe. Evergrande responded to the Chinese government by selling properties at high discounts. However, like every other disadvantage of a ‘fire sale’ at the sign of a company’s financial distress, the sale failed to make interest payments, further leading to defaults.
On 20 September, the company missed the deadline to meet interest payments of their bank loans. However, the crisis was not unforeseen, as it has been in the making since the beginning of the year when Evergrande’s shares plunged 85%.
One of the larger issues that sees the light has been the inflated property markets across China, a clear indication of a looming crisis in the making. The little or a clear absence of property taxes, made real estate an attractive asset. Less than 3 years ago, the nationwide home prices across China, averaged 9.3 times higher than the annual incomes. With sprawling ghost cities indicating a larger housing bubble, the city of Kunming in Yunan recently saw 15 unused skyscrapers being demolished after remaining vacant for nearly a decade.
Implications
Reuters quoted Alan Ruskin, a macro strategist at Deutsche Bank, that "Evergrande has the potential to be the largest corporate debt default ever, with spillovers to other financial institutions, Evergrande's suppliers, homeowners, wealth product holders and other property companies."
While the company has started repaying investors in their wealth management business since last week, this won’t suffice for the scores of middle- class Chinese citizens who have bought property from Evergrande even before the construction of some buildings began. There could also be spillovers into other complementary companies involved in the construction, design and material supply fields. A larger financial crunch would however would be on China’s financial system as Evergrande’s debt runs to around 171 domestic banks and 121 financial firms in the country.
As a result, all eyes are on Beijing to see if they will step in to initiate a set of debt restructuring or rescue measures. However, the prospects for such a rescue seems bleak after Hu Xijin, the editor-in-chief of the government backed Global Times newspaper posted on social media that Evergrande should save itself and not rely on a government bailout. He added on that the potential bankruptcy of Evergrande is unlikely to trigger a financial crisis like in the US after the collapse of the Lehman Brothers in 2008.
Evergrande is due to pay another $83.5 million as interest payments on 23 September and $47.5 million 29 September. The world’s second largest economy stands at the risk of a potential downward spiral if major lenders decide not to extend the payment deadlines.
References
“EMERGING MARKETS-China Evergrande contagion fears take toll across markets, Reuters, 21 September 2021”
“Fearing a Property Bubble, China Overhauls How It Sells Land, Wall Street Journal, 16 March, 2021”
“China: What is Evergrande and is it too big to fail?, BBC, 21 September 2021”
“China Evergrande is not 'too big to fail', says Global Times editor, Reuters, 21 September 2021”
IN BRIEF
by Keerthana Nambiar
INTERNATIONAL
China
On 20 September, a Chinese Foreign Ministry spokesperson Zhao Lijian extended China’s support to the Russian population for selecting their path to development and also to the Russian President Vladimir Putin in his journey as a leader of Russia. The statements were made after the preliminary results of the Russian Duma elections showcased a win for the United Russia Party. Zhao referred to the party’s win as the people’s choice and reflecting of their will. He stressed upon deepening cooperation between the two countries and promoting inter-party exchanges. (China supports Russian people in choosing development path: FM spokesperson, Xinhua Net, 20 September 2021)
China will be narrowed with AUKUS in the picture
According to CNBC, China could accelerate its military presence in response to the US- Australia submarine deal. China has denounced a nuclear submarine deal among the U.S., the U.K., and Australia calling it a cold war mentality. Thus, the tensions in the Indo-Pacific region will likely continue substantially. According to a Reuters report, Chinese Foreign Ministry spokesman Zhao Lijian slammed the three countries for “severely damaging regional peace and stability, intensifying an arms race, and damaging international nuclear non-proliferation efforts”. A senior analyst at the Eurasia group Ali Wyn quoted “With this deal, I do think that the military balance is going to shift a little bit more away from Beijing”. (China could accelerate military efforts in response to U.S.-Australia submarine deal, analyst says , CNBC, 21 September 2021)
Nikkei 225 falls 2 per cent with China’s Evergrande Group
On 20 September, Japanese stocks declined as they returned to trade following a Monday holiday. The Nikkei 225 closed 2.17% lower at 29,839.71 as shares of conglomerate Softbank Group plunged 4.98%. The Topix index shed 1.7% on the day to 2,064.55. Shares of China Evergrande Group fell 0.44%, while the Hang Seng Properties index climbed 2.97%, bouncing back partially from Monday’s losses. Evergrande’s chairman tried to reassure market, saying the firm will fulfil its responsibility to partners, property buyers, investor, partners and financial institutions. The Chinese economy is likely to face a backlash with The Evergrande. It risks an economic slowdown for countries at a global level to expand their businesses. (Japan’s Nikkei 225 falls 2% as investors monitor Evergrande developments , CNBC, 20 Sptember 2021)
INTERNAL
China’s Western Interiors inch their way to development and economic growth
On 21 September, Xinhua reported that the European parcel delivery group DPD had signed a deal to set up its regional office in Chengdu, Southwest China. The new development brought to light China’s Wes Development Strategy that was put into action in 1999. Two decades after the policy was launched, the western regions in China have achieved great progress and development. The strategy was initiated to reduce the gap in development and economic growth between China’s Eastern and Western regions. Tibet, one of the regions that have not fared very well in the progress charts, set up a brand to encourage the sales of the local products. The modes of transport and routes are also developing as more companies set up their offices in interior China. (Huaxia, China Focus: Western regions on fast track of high-quality development, Xinhua Net, 21 Spetember 2021)
Hong Kong Elections Committee finalizes the vote-counting marathon
On 20 September, Hong Kong election results were announced following a delayed vote count that took nearly 14 hours. This is the first election after the electoral reform was implemented in March since Beijing’s intrusion into the city’s political system. A public apology came in with the announcement of results from the electoral officials for the “unreasonable” time. The liaison office said “The election helped to set Hong Kong on a path away from the ‘vortex of pan-politicization’ and to promote the rational development of electoral culture. It also marked a solid and genuine step in advancing democracy and good governance”. The State Council’s Hong Kong and Macau Affairs Office described the poll as symbolic in that it represented a full implementation of the “patriots governing Hong Kong” principle. (Hong Kong’s Election Committee finalised after marathon vote-counting process, with outlier candidates left in the cold, South China Morning Post, 20 September 2021)
Xi Jinping to address general debate of UN General Assembly
On 21 September, President Xi Jinping will address the United Nations General Assembly via video link. Chinese Foreign Ministry Spokesperson Hua Chunying announced, "Chinese President Xi Jinping will take part in the general debate of the 76th session of the UN General Assembly via video link on September 21 and will deliver an important speech." The foreign ministry did not specify any particular topics that Xi Jinping will be bringing up in his speech. The 76th UN General Assembly (UNGA) opened on September 14 and the high-level week started on September 21 and will last until the 27th. As the United Nations General Assembly opened its 76th session, and UNGA President Abdulla Shahid urged member states to embrace hope and initiate a new narrative after a challenging year with climate change, conflict, and COVID-19. (Chinese President Xi Jinping set to deliver virtual speech before UN General Assembly, Free Press Journal, 20 September 2021)
Chinese Vice Premier addressed business community and encouraged engagement with Hong Kong
On 20 September, the Chinese Vice Premier Han Zheng urged the business community to build a market-oriented, rule-based and internationalized business environment in order to fasten the pace of development of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone. The statements were made by Han while he was on inspection trip to Shenzhen city. He also encouraged Shenzhen and Hong Kong to improve cooperation and plan out industrial layout for China’s high-level opening-up. (Chinese vice premier stresses building market-oriented, law-based, internationalized business environment, Xinhua Net, 20 September 2021)
SCIENCE & TECHNOLOGY
Chinese spacecraft docks with the Chinese space station in preparation for the next space walk
On 20 September, the Tianzhou-3 cargo spacecraft successfully docked into the Tianhe core cabin 6.5 hours after the launch. The mission is part of the preparation for Shenzhou-13 which will attempt to live in space for six months, breaking the record for the longest duration spent by Chinese astronauts. The spacecraft carried the daily supplies, fuel, propellants and space suits for the upcoming mission. (Tianzhou-3 completes rendezvous, docking with China’s space station, Global Times, 20 September 2021)